Daily Wrap

Well how was that for increasing volatility?

The Dow is back red for the year to date and the S&P has joined it.

 The major averages year to date with the SPX (green), the Dow (white) and Transports (salmon) all negative for the year.

Since the F_O_M_C knee jerk reaction, almost everything has retraced the knee jerk move, transports are far and away the worst performing.

 These are the averages intraday.

I suspect there may have been a "FUNDAMENTAL" reason for today's decline, the thing is once Wall St. is set on a move and has invested in it, even an intraday bounce, they usually see it through.

While it's impossible to tell, this would be one of those events the market couldn't or didn't discount and the very weak structure of the market is what causes all of the downside volatility.

My guess if I were to take one...

S_E_C vote to require HFT firms to register with FINRA. Who knows if that's correlation or causation, but from yesterday's expectations, it would seem to make some sense, some...

S&P sectors...

 Since the F_O_M_C only 2 sectors haven't retraced their knee jerk, Utilities and Consumer Staples, Financials are now -2% below Yellen.

Sector perform,ance today with Tech lagging and Energy leading.

On the day, 8 of 9 S&P sectors closed red with only Energy closing green despite the horrible EIA inventories today. Crude got a lift from another fundamental event that wasn't discounted, the militants and proxy war in Yemen between Iran and Saudi Arabia as oil moved like this today...

At #1 EIA comes in ay above consensus and USO drops. At #2 news on the Saudis amassing troops and equipment on the 1100 mile border with Yemen sends oil higher. At #3, news that Yemen's president fled the country as the rebels with US equipment (about $500bn worth) come closer to the presidential palace. At #4 oil pulls back a bit on the NYMEX close.

This was largely a fundamental event, I suspect oil still comes down, either way with a half size position I would NOT chase it here, but wait for a pullback and lets see if it's really going to pullback or whether it may be better just to take whatever we can get at that point.

As mentioned, 8 of 9 S&P sectors closed red except energy on the Yemen news. Of the Morningstar groups, only 14 of 238 closed in the green, 224 closed red. This is what we would call a 1-day oversold event.

AAPL got whopped...

AAPL's worst daily performance in 2 months.

Biotechs didn't fare any better, shortly after Cramer reassured everyone that it would be ok, Biotechs

Worst daily performance since April 10/2014.

Over the last 3 days, biotechs have lost more than 12% on volume, interestingly we just started seeing something funny going on last week before this decline after a couple of months of staying out of the way...

This was posted at the red arrow, NASDAQ BIOTECHS / IBB last week...

Transports are down nearly 5% over the last 3-days as we have recently covered them and opened positions there as well.

Even bigger picture, transports have failed to confirm industrials all year.

The $USd lost some ground today while EUR/USD basically pegged in place and is offering the market some upside support along with other leading indicators.

One of those leading indicators on a very short term 1-day basis is yields which ,may have come undone today due to a weak 5 year treasury auction, or it may just be coincidence and they are simply ready to support a bounce. See yields in the Leading Indicators post from this afternoon.

It seems like stocks are near ready to catch dow to HY Credit's intermediate term trend.

As you know on a primary trend perspective, stocks have a lot further to go on the downside, but credit tends to lead and stocks tend to follow.

I'd say the October lows are an easy first target, but once we break those, there's no coming back, we'll be well in to a primary bear market.

As mentioned we have a 1-day oversold condition between S&P sectors and Morningstar groups.

From a Price/Volume Relationship perspective, we finally have a Dominant Price/Volume Relationship between all of the averages , Russell 2000 included and that is Close Down/Volume Up with 24 of the 30 Dow stocks, , 84 of the NASDAQ 100, 1074 of the R2K and 292 of the SPX500 with less than half of the Dow and S&P stocks above their 50-day moving average (245 and 14 respectively).

Close Down/Volume Up is a strong 1-day oversold bias in the Dominant P/V. Taken with such heavy skewed losing sector performance, I see every reason to call this a 1-day oversold event and expect a bounce the next day. The question is, how much fear is in the market, how many carry trades are being unwound and how many margin calls are going out?

The best Tweet if the day from NANEX founder, Eric Hunsader

That's it for tonight, we'll see if the market can bounce here, it is well set up to do so, however if it fails, I would suspect we'll be looking at the October lows sooner than later although I think we'll be there soon either way.

Futures look similar to the earlier update, they are working on an intraday 1 min positive divegrence and they have a lot of support and a deeply oversold 1-day condition, if they can't bounce here, well... you know.

I'll check in later if there's anything going on in futures.

Leading Indicators

This is definitely an interesting scenario because if the divergence didn't get run-over, the minimum 3C target concept comes in to play which is wherever we first saw the divergence which would have been around 1 p.m. yesterday, the market will almost always surpass that level, which would make for one heck of a short term bounce, but more importantly to the bigger picture, it would significantly increase volatility even beyond today's huge pump of volatility, which leads us to decline either way you look at it. Again, a win/win scenario.

There are still positive divergences among the averages, the best looking is probably SPY and the worst is probably IWM. There was major damage done as you'll see on the intermediate to longer term charts, while the positives are kind of small piece shell collecting to ready for a move that should come, but they know won't hold otherwise the accumulation would have been on the intermediate charts rather than distribution.

First the averages...

 SPY 1 min has been pretty consistent. Those of you watching ROC of price should note some divergences by now as you can see SPY is moving laterally in some kind of "U" shaped potential base pattern. Volume also looks good inrtraday and on the day, although I must say this is one ugly daily candle, but this is what we have expected since long before this bounce or the F_O_M_C knee jerk appeared so no one should be surprised.

 SPY 2 min is positive and showing migration, that's something that's missing from nearly every other average, they have a few positives, but they don't have the consistiency of the SPY, which is why I think it will show better relative performance even though it already has today and you might expect the Q's or IWM to have the most to retrace,

3 min SPY

And out to a 5 min SPY.

If it were not for the SPY divergences, I probably wouldn't even bring up the possibility of a bounce, which should really have no bearing on anything you may be doing other than taking some gains in options that you think might suffer in the case of a bounce as I did today.

I do not think this should be traded long and I do think if there is a bounce, no matter how strong or weak it may look, it is certain to fail, as certain as I have been through this entire year even when knowing we needed to break above the market's early 2015 range.

 This 10 min SPY chart is what I'd call intermediate, it is about the right timeframe to track the moves in the market for 2015 which have been volatile, but more or less largely lateral compared to previous quarters/years.

As you can see, the February cycle's stage 3 top saw strong leading negative distribution, there was a positive divegrence in between as we had suspected on the 10th of March and the bounce off that and the F_O_M_C saw heavy selling, especially in to the F_O_M_C knee jerk reaction and we are now at a new leading negative low in 3C so major damage has been done.

 DIA 1 min large relative positive

DIA 3 min leading negative and then leading positive.

15 min DIA distribution in to the F_O_M_C and post F_O_M_C. How do you think we retraced the entire knee jerk reaction? It was used to sell in to which is what we did as well.

QQQ 2 min doesn't inspire a lot of confidence.

The QQQ 5 min looks a bit better and suggests a bounce.

The 15 min is leading negative at a new low for 3C meaning this last bounce we first identified as a probability on March 10th, and then saw even more upside on the F_O_M_C, has seen some of the heaviest distribution of the year.

 IWM 1 min

However there's nothing after the 1 min and this 5 min  shows sharp distribution in to the F_O_M_C knee jerk move,  this is why I ALWAYS warn about these,

The IWM 10 min is also showing a very strong bout of distribution in to this bounce and F_O_M_C knee jerk.

As for Leading Indicators, there's EUR/USD so long as that holds up, you've seen that earlier today.

Then most leading indicators are positive here, a few are mixed, but I can't blame anyone as this was one of the ugliest days since

 This is HYG, High Yield Corp. Credit, the go to asset to ramp the market and it was supportive yesterday, today it looks like some people who were holding those shares in support of the market got cold feet real quick. However, as you know the longer term and primary trend are extremely negative, but just slightly longer than this 1 min chart there's still some support from HYG unless it loses that tomorrow as well...

5 min HYG leading the SPX, this is about the area the SPX "should" bounce to not only based on HYG, but where we first saw the divergence yesterday and the concept of 3C targeting based on those observations.

 In addition, High Yield Credit is leading today as well and yesterday, so both days looks ready for a bounce.

You have to remember one of the biggest things we are looking for in a bounce is increasing volatility. It will take quote a lot to out do today, but that increasing volatility is what makes real downside moves and makes them stick.

The longer term trend of HY Credit on this 5 min chart shows not only it calling the February cycle top, but also calling this bounce as a distribution event and even a bounce here won't change that.

 Here I have inverted the SPX (green) so you can see the normal correlation vs VXX (VIX short term futures), intraday it was right on, but...

On a 5 min chart, VIX short term futures are still underperforming which is another reason of clue as to why I don't think this is the move down that takes this market apart, but it is right around the corner and a lot of damage was done today.

 Spot VIX IS largely inline with SPX (inverted here).

One of our Pro sentiment indicators is leading the SPX (normal) as you can see, the second we use for confirmation...

 was leading and fell apart today in line with the market.

Interestingly, bonds were sold today as the 5 year yield is leading, this acts like a magnet and pulls the SPX / market toward it so short term it is supportive (today's divergence).

The 10 year yield is as well as is the 30, but these are all short term. Anything intermediate or longer is deeply dislocated to the downside and the market should revert to that reality much lower.

Most of what you see above will serve as the Daily Wrap for tonight as the market is what it is, today it gave us nice gains on recently opened positions and put out longer term positions that much closer. I suspect a bounce the same as yesterday, but if fear runs this thing over, then what have we really lost except maybe some extra gains on short term option trades?

MARKET UPDATE

I'm going to include Leading Indicators with the chart updates, but by the time I get those out, the market will have closed.

Lets just say after looking at everything (I'm capturing the charts now), I'm glad I closed the QQQ/SPY puts earlier, I think it was the best decision for what I can see at this time.

Going in to the close or tomorrow, I see no reason the signals that started yesterday don't make good, if they do get run over and there has been some very serious long term chart damage done, then that's just telling us how much worse off this market is than we thought and I think it's in pretty bad shape.


So I do anticipate a bounce, I do believe yesterday was part of it, but I also see the larger trends are showing significant damage done. As far as setting up the intraday trend or bounce, it's there, there's definitely a problem of relative performance, the SPY seems to look the best and if I had to go by the IWM or QQq only, I might call a bounce very questionable. So I do anticipate there to be a relative performance issue between the averages.

The rest I'l get out in charts, I still would NOT play thins long, but let the trade come to you and short in to it. As I said yesterday, if the bounce doesn't materialize, then your trend shorts and swing shorts work for you, if it does, there's no way in my view it can possibly hold so it makes for an excellent area to short in to, again a win either way unless you introduce risk and go long on a piggy back trade.

Quick Update (Index Futures)

You may recall the EUR/USD chart, specifically the 60 min one in which I said according to the correlation ES was at least 15 points above the correlated value. As you'll see below the approximate 45 point drop since Monday morning's weekly highs has penetrated below the EUR/USD correlation, although EUR/USd seems to be showing some very slight near term strength developing that was on the fence a bit earlier.

 This is the divergences intraday (1 min) for EUR/USD, they were a little on the fence, but have since recovered and I double checked $USD and EUR, and both confirm, although I'd call this a "soft" divergence. In any case, you'll see who leads who by the nose below...

 This is EUR/USd in candlesticks and ES (SPX E-Mini Futures) in purple. I have been watching for near term reversion to the mean which happened for sure this morning, but although there was a brief period of correlation (green box), note ES continuing to fall in a parabolic decline.

As you know, I rarely trust a parabolic move up or down as they tend to end in the same way they began, just in the opposite direction. However, a better argument can be made for a parabolic drop holding as Fear is a stronger emotion than greed, thus the upside parabolic moves are powered by greed, the downside by fear, which is also why bear markets tend to fall at least 2.5x faster than bull markets rise.


This is the 7 min EUR/USD vs ES chart, again note brief reversion to the mean before ES tumbled even more. In this case, ES is NOT leading EUR/USD, but in the recent past EUR/USD has led ES so if there's a bias here, it's to the upside on a bounce, but the main chart I have been looking at is the 60 min chart as ES/ or the broad market, over ran the FX correlation and reversion to the mean was just a matter of time, but like all things in the market, it moves in extremes and severely overshot.

This is the 60 min EUR/USD vs. ES, note the downside overshoot, which is perfectly normal, it's just the excess of emotion in the market as well as the flawed structure. I'd say margin calls and the like although we know generally it's too early for that other than proactively heading them off.

The Carry trade unwind is going to be more and more a part of our analysis in the coming days and weeks ahead, it was the one thing I expected to see more than anything else, even HY Credit diverging, on a true primary bear market turn.

As for the Index futures, you may remember from yesterday and earlier today, the SPY looked the best on a positive divergence basis and the QQQ/IWM looked the worst, that is reflected here too in intraday futures.

ES is starting a leading positive divegrence and just as TICK not only hit the selling climax extremes associated with short term capitulation...but also a change in price's ROC to lateral from fiercely down.

 NYSE intraday TICK Index shows the internal trend with a downtrend early and then a massive area of extreme readings of -1500 or so, then recently as things have calmed down, we have a slight uptrend in TICK.

 NQ intraday positive divegrence forming, remember right now EUR/USD's correlation is sitting above for the first time this week.

The TF/Russell 2000 futures chart has a slight positive, although I would not have posted it if it were not for the ES/NQ charts above this one.


While I still would not trade this long as it introduces unnecessary risk that really is greed or boredom, both of which are deadly to traders, I did have enough faith to let go of short term leveraged Put positions to take those gains and look for a better entry rather than just let them potentially go red and turn back down.

I'll have a leading Indicators update out shortly.

SPY / IWM P/L

Last Tuesday and Wednesday I was (as always) warning to beware of the F_E_D knee jerk reaction. I say F_E_D because it's not only on F_O_M_C dates, although primarily, but almost any F_E_D event in which anything that is said can be construed as policy. For whatever reason, whether it's manipulation , for instance say you are a hedge fund manager long with more leverage than you care for and suddenly the F_O_M_C removes "Patience" from their policy statement as feared, but at the same time strike a dovish tone through the rest of the statement even though the ONLY thing that matters in truth is that they just opened the door to the feared June Rate Hike.

The Dovish end of the statement gives the market room to maneuver and in this case as an over-leveraged hedge fund manager with too much long exposure, I need to sell a lot of that and what do large funds need to sell large positions without being taken to the cleaners? They need demand and they need higher prices to sell in to. You might remember about a month or so ago or with NFLX's earnings and our trade set-up there which is now at a 11+% gain (short), I showed some divergences before key events that were going to move the market despite what the outcome of the event/earnings were because in an HFT world, price reaction defines the market's perception of the event. In NFLX's case, if you read through the earnings you realize how horrible they were, but on an +18% gap up the next day, you figure someone must know something more than you and price reaction defines perception.

In NFLX's case just as in the case with F_E_D knee jerk moves, that initial perception gives large funds what they need to get out of what they know was a negative event such as NFLX's earnings...

In NFLX's case we not only knew there was a perception set-up, but knew the earning's stunk and were already looking for the trade set-up with the initial idea to short NFLX at the right time as posted the next day after earnings on January 21st, NFLX trade Set-Up (the gap up day).

At February 26th after being patient for some time, we finally entered NFLX short, Trade Idea: NFLX Short at the red arrow, in fact at the exact high of the entire NFLX run which we suspected back in January was a gap fill attempt to allow middle men trapped with inventory at higher levels at massive losses to get out.

We knew the earnings were horrible and we knew there was a set-up to send NFLX higher no matter what, TO CREATE THE PERCEPTION NEEDED TO SELL THEIR POSITION.

Now looking at the market since the F_O_M_C knee jerk, which we have seen last as short as a few hours and as long as a couple of months, but generally it is retraced within a week. The initial knee jerk reaction is almost always the wrong one and I suspect the above scenario is the reason why.

PRICE IS DECEPTIVE AND THE MARKET MOVES ON PERCEPTION, EVEN WHEN THE REALITY IS FAR FROM WHAT YOU INITIALLY SEE ON THE CHARTS.

This is a chart of all the major averages including Transports since the post F_O_M_C knee jerk, as you can see, nearly all have retraced the knee jerk 5 days later.

Here's the P/L for the just closed SPY/IWM Puts:

At a cost of $3.81 and a fill on the sale of $4.60, the SPY puts came in at a gain of +20.7%

At a cost of $2.51 and a fill on the sale of $2.80, the IWM Puts came in at a gain of +11.5%

Niether of these were the gains I had hoped for (usually around 50%), but now you can see why I prefer to buy quality and more time than I think I'll need, usually about 3x more time. I can always re-open these and will if given the opportunity at a more appropriate strike and expiration.